4 Tax Mistakes Small Business Owners Make—And How to Avoid Them

When you're running a small business, it’s easy to get caught up in daily operations. For example, handling sales, managing your team, and keeping customers happy. But there’s one area that often gets pushed aside until it’s too late: taxes.

Unfortunately, even honest mistakes can lead to hefty fines or a dreaded IRS audit. But you should know that most common slip-ups are completely avoidable once you know what to watch out for. That said, below are four common tax mistakes small business owners in Chicago make. Additionally, there are practical ways to steer clear of them and maintain a financially sound business.

So, dive into the article!

1. Misclassifying Workers and the Risks You Don’t See Coming

One of the most misunderstood areas of small business tax is how you classify your workers. It might seem harmless to label someone as a contractor rather than an employee. It shows fewer obligations, less paperwork, and no payroll taxes. But this misclassification can open a legal can of worms.

If you’re directing how, when, and where the work is done, that person likely qualifies as an employee. The IRS takes classification seriously because it affects how taxes are collected and benefits are handled.

If you commit such mistakes, then you can face certain issues, including:

• You could be liable for unpaid payroll taxes, back wages, and penalties.
• Your worker could file a complaint with the Department of Labor.

How to avoid it:

• Review the IRS’s guidelines on the independent contractor vs. employee distinction.
• Create clear contracts but ensure they match actual work conditions.

However, no matter how much you try to be cautious, there are some instances where you’re stuck. Therefore, businesses should consult a trusted advisor for a proper assessment. Finding them is also easy. You can search online for keywords like “Chicago tax advisor” or “best tax advisors near me.” The sooner you get it right, the safer and less expensive your business will be.

2. Overlooking Legitimate Deductions 

Deductions are your legal opportunity to reduce taxable income by subtracting qualified business expenses. But many small business owners are either too cautious or too disorganized to claim everything they’re entitled to.

You may be missing out on:

• Home office deductions – even a small dedicated workspace may qualify.
• Mileage and travel costs – business trips, conferences, or deliveries.
• Marketing and digital tools – website costs, software, ads, subscriptions.
• Start-up costs – if you’re in your first year, you might be eligible to deduct a portion of those expenses.

This is important because every dollar you deduct lowers your taxable income, which can significantly reduce how much you owe. Failing to claim eligible expenses simply means you're paying more tax than necessary.

How to avoid it:

• Keep detailed, categorized records throughout the year.
• Use accounting software to log expenses in real-time.
• Have quarterly or annual reviews with a professional to ensure nothing is missed.

3. Inconsistent Record-Keeping That Derails Everything

Even the best intentions can fall apart without a good system. Poor financial record-keeping is one of the biggest reasons for missed deductions, incorrect filings, and audit flags.

Think about:

• Losing paper receipts you meant to scan.
• Forgetting to record that lunch meeting.
• Guessing on mileage months after the trip.

It adds up — and when the IRS comes knocking, simple excuses won’t protect you.

How to stay organized year-round:

• Go digital. Use online tools to track income and expenses.
• Set a recurring reminder to reconcile accounts each month.
• Scan and store receipts in cloud folders or use expense apps that do it for you.

When you keep up with documentation regularly, the season becomes smoother and less panic-inducing.

4. Try to Do the Work By Themselves

This might be the most preventable mistake of all. Many business owners try to do everything themselves. Undoubtedly, that’s admirable. However, taxes are one area where flying solo can be costly.

DIY tools can’t:

• Personalize your strategy.
• Catch nuanced tax savings.
• Help you avoid legal blind spots.

And when mistakes do happen, you’re stuck fixing them at the worst possible time.

The fix:

Bring in a professional before problems arise. A knowledgeable advisor can help you:

• Choose the right business structure.
• Maximize deductions specific to your industry.
• Set up proper payroll and estimated tax payments.
• Plan ahead for growth, not just survival.

Build a Strong Foundation

Taxes may not be your favorite part of entrepreneurship, but they don’t have to be your biggest headache, either. By understanding these common mistakes and taking action to avoid them, you give your business a stronger financial foundation.

So don’t wait until April rolls around. Stay proactive and informed, and when in doubt, partner with a trusted advisor who knows the ins and outs of small business tax.